Saturday, February 5, 2011

Social Security and Medicare - A Question of Distribution and Allocation

Over at Matthew Yglesias' place I've gotten into a lot of really good discussions with various commentators about economics and politics. I still read and comment there, but recently I've gotten the feeling I'd like to have a smaller pond of people so that we could get into a more involved discussion. The idea is that I'll take quotes from comments and use them to create further posts, creating a moderated front-page discussion without actually having to curtail the freedom of people to post what they want on the comment threads.

I don't know whether I'll be able to attract the folks I'm after (primarily thinking of DMonteith, studentee, Stephen Eldridge, and my MMT brethren like beowulf et al, but all are welcome) or whether this will just continue to be a sandbox for me to flesh out my ideas. But I thought I'd start with an issue that comes up a lot in both progressive and conservative circles - Social Security, Medicare, and "entitlements" generally.

The problem with Social Security and Medicare is often described as one of pure finance. We are spending X number of dollars on old people; thus we need to take X number of dollars away from young people. Sounds intuitive enough, but if you're reading this blog you probably already know that at the federal level it doesn't work that way.

In actuality the problem of Social Security is almost entirely one of distribution - that is, we have decided that it's within the authority of the federal government to set some minimum level of consumption for retired people that's (mostly) independent of their past or current production. When the population is older, we'll have to spend more resources meeting this standard, but there's no reason to believe this will create a problem. Old people don't actually consume that many resources (with an exception that we'll get to in a minute) so it would take a REALLY large population of elderly people to outstrip our ability to easily produce the consumer goods we need. The current dire-looking projections don't come anywhere close to that - the economy can easily meet the needs of a very large retired population.

The problem, as always, is not primarily with this distributive question. We can answer the question "what standard of living should old people be entitled to?" create a program to pay for it, and then we can provide the goods and services through the private market. Our system is very, very good at that - that's the reason that while communism prides itself on egalitarianism, the lot of the poor and working classes in a big, rich capitalist country is generally better than what they would get living in a big, rich communist country.

There is a real problem, though - old people do consume a very large share of one type of resource. That resource is medical care. As it happens, the price system does not do a good job of allocating medical resources - shortages, runaway costs, and low (even negative) marginal utility are the norm in our medical system*.

Thus our aging population will put even more strain on this system which is already under a lot of pressure. That's not good! But it's not primarily a finance problem. The problem is that our medical system doesn't work properly, and the inefficiency this failure creates is going to increase as our population gets older. You can't fix that with tax policy - you have to fix the medical system.

* You'll notice I never use the term "health care" if I can avoid it. I don't like the term as I think the concept of "health" encompasses a lot of things that don't really have much to do with the medical system. For my purposes the medical system is the system we use to deliver doctor's services to the public. It doesn't include other types of health-related consumption and production.

1 comment:

  1. Hey Raul,

    This is JasonSL from Yglesias's blog. I appreciate your point about avoiding "health care system" when referring to the medical system -- agricultural and food policy, land-use policy, alcohol and tobacco policy, etc., are all things that arguably have as much or more influence on the care of people's health than does the medical system; I intend to try to change my vocabulary so that I don't continue to exaggerate to myself and others the role of the medical system in determining health outcomes.

    I'd amend your third-to-last paragraph a bit. It's not that the price system doesn't do a good job of allocating medical resources, it's that, at least when it comes to Medicare, we're not really using much of a price system. The demands that an individual can make on Medicare are essentially limitless -- seniors seeking medical care are not sensitive to price, since they don't bear the cost themselves, and civil servants are not constrained by a hard or somewhat hard cap on how much funds they can disburse.

    Similarly, if you're too poor to participate in a market, then price signals don't matter to you. The price system isn't failing the poor so much as the poor aren't even participating in the price system. I guess, in a sense, since the government is supposed to shape the price system so as to allow the medical-care market to deliver services to the poor, the price system is failing, but you could also correct the exclusion of large slices of the public from the medical system by alleviating poverty.

    (I don't really think we disagree on anything that's been talked about -- I'm just trying to sharpen your points and voice my appreciation for your blog.)